Major nations struggled Thursday to break a deadlock on how to fix the global economy as President Barack Obama warned the U.S. cannot continue to be a profligate consumer on borrowed money.
Obama and the leaders of China, Japan, Germany and South Korea were also scheduled to hold a flurry of one-on-one talks bound to touch on sensitive trade and security issues ahead of the Group of 20 summit of major rich and developing nations, which officially opens later Thursday.
Compromise among major G20 countries has looked difficult in recent weeks. It is divided between those like the United States that see the top priority as getting China to let its currency rise and those irate over U.S. Federal Reserve plans to pump $600 billion of new money into the sluggish American economy, effectively devaluing the dollar.
“Reducing imbalances between developed countries and developing countries is an urgent matter we have to resolve for a balanced global economy,” South Korean President and summit host Lee Myung-bak told a business leaders’ conference ahead of the meetings.
“We must coordinate together because if each country asserts its own interest, it may help them for the time being, but the world economy will eventually retreat,” he warned.
The G20, which brings together the world’s richest economies and emerging countries such as China, India and Brazil, has become the centerpiece of top-level efforts to revive a struggling global economy and to prevent a financial meltdown of the kind seen two years ago.
Over the past two days, government ministers and senior G20 officials called ‘Sherpas’ in diplomatic-speak because they do much of the groundwork have labored to hammer out a substantive joint statement to be issued at the end of the summit Friday.
“Major countries have been deadlocked, so the agenda is likely to be handled when leaders gather at the formal reception and working dinner” that is scheduled for Thursday evening, said a summit spokesman, Kim Yoon-kyung.
A goal of the G20, established in 1999, is to help coordinate economic policies among major economies.
A major issue confronting the G20 is how to craft a new global economic order to replace one centered on the U.S. running huge trade deficits while countries such as China, Germany and Japan accumulate vast surpluses. The U.S. runs a trade deficit because it consumes more foreign products than it sells to others.
In a letter to fellow leaders at the G20, Obama made it clear that the U.S. cannot remain the world’s consumer, propping up others by borrowing and spending. He is pitching for a balanced recovery across the globe {hbox}” tougher to achieve when national interests collide.
“The foundation for a strong and durable recovery will not materialize if American households stop saving and go back to spending based on borrowing,” the president wrote.
The message was primarily aimed at China, whose trade surplus with the U.S. is bigger than with any other trading partner, including the European Union. The U.S. contends that China deliberately undervalues its currency, the yuan, which gives it is exports an unfair competitive edge.
In his letter, Obama pushed for exchange rates based on the market and no more “undervaluing currencies for competitive purposes.”
As the summit approached, the currency spat received fresh fodder when the U.S. Federal Reserve last Wednesday announced plans to purchase $600 billion in long-term government bonds to try to drive down interest rates, spur lending and boost the U.S. economy.
“I will say that the Fed’s mandate, my mandate, is to grow our economy,” Obama told reporters. “And that’s not just good for the United States, that’s good for the world as a whole.”
Analysts say it could spark an influx of cash into the financial markets of emerging nations in search of higher returns, making their currencies stronger, their exports more expensive and creating bubbles in stocks and other assets.
While a cheaper dollar would benefit U.S. exports it could also trigger a so-called currency war as countries race to devalue their currencies.
Another key issue expected to be discussed at the summit is a proposal by Washington to set fixed targets for trade gaps. But Chancellor Angela Merkel said Germany won’t accept it, echoing the sentiments of many other countries.
Germany is the world’s second-biggest exporter after China and strong exports have helped its economy to stage an impressive comeback this year {hbox}” but its trade surpluses have drawn criticism abroad.
“We reject quantified bandwidths for acceptable imbalances for good reason because ... competitiveness must be able to express itself, also in export ratios,” Merkel said before leaving for Seoul.
Apart from currency issues and trade gaps, the G20 leaders are expected to endorse beefing up supervision of large banks and other financial institutions and to voice support for giving developing countries a bigger say in the International Monetary Fund.
The summit will be “an important turning point in establishing a new paradigm for global financial regulations that will govern future financial markets,” said Chin Dong—soo, the chairman of South Korea’s financial regulator.
After the G20 summit, many of the leaders will go to Yokohama, Japan for the Asia-Pacific Economic Cooperation forum summit this weekend.
The APEC is mulling how to move toward establishing a Pacific-wide free trade zone that would encompass more than half the world’s economic output.
On Thursday, foreign and trade ministers of APEC nations wrapped up talks, vowing to refrain from fresh protectionist measures and push ahead with world trade talks.
“We will do our best to avoid protectionism,” Japanese Foreign Minister Seiji Maehara told reporters after the talks ended in Yokohama.
